Curb university costs by stemming debt

Keeping student debt at bay is not an easy task, but here are some tips on how to try

Keeping student debt down is tough, but there are ways to get back without breaking the bank.

By:Kristin Kent Published on Thu Aug 15 2013

Next year, Katie Jones* will graduate with $50,000 in student debt.

The 26-year-old student exhausted her savings while pursuing her undergraduate degree. With no other choice — like 60 per cent of her fellow students — she applied for student loans.

Jones doesn't take her growing debt lightly.

“I'm now doing a master's in public policy at the University of Toronto. It is a two-year degree and costs $16,000 in tuition per year, which is a lot of money,” she says.

A blend of private and public loans covers half of her annual tuition. To fund the rest, she applies for grants and scholarships.

Her loans do not cover rent, transportation, food and other necessities.

“Last year, I worked all summer and two months into the fall. I saved up enough to cover my rent for the entire school year. But I was exhausted, so I left at the end of October,” she says.

“This year, I'm working for another company. I'm going to stay on this fall and work only eight hours a week, which is more manageable. And that should cover my rent,” she says.

“I just don't know how some people spend $900-plus on rent every month. That's just insane to me,” she says, adding she pays only $500 per month.

Jones says she would “be screwed without the money I receive from my father. It covers all basic living costs and makes all the difference in the world,” she says. Jones wants to pay off her debts as soon as possible.

“I'd like to have them gone and paid off as fast as possible so I don't have to worry about them accumulating interest anymore,” she says.

“I would love to pay off my line of credit through grants this year if I could. That way, I won't have as much debt when I graduate,” she says, adding she received $8,000 in scholarships last year, but only $2,000 so far this year.

When it comes to funding an education, students need to become increasingly resourceful.

Full-time students in undergraduate programs paid 5 per cent more in tuition fees this past academic year than they did the previous year, says Statistics Canada. This follows a 4.3 per cent increase from the year prior (2011-12).

Tuition fees rose in all but one province, Newfoundland and Labrador, where they remain the lowest in the country at $2,649 annually.

Ontarians pay the most. A student who pursues an undergraduate degree in this province is expected to pay $7,180 in tuition costs annually.

That does not include the cost of books, supplies, student fees, compulsory fees, transportation, residence (if required), meal plan/food and other living expenses.

These costs can break a student's budget.

The Canadian Federation of Students (CFS), an organization representing more than half a million students nationally, says a student who takes on a loan in the province of Ontario will graduate with about $37,000 in debt.

“Debt makes it difficult for students to start their lives after graduation,” he says.

“It's smarter for the whole economy if student debt is reduced. Students will then have more opportunity to invest in a house, maybe buy a car, or even start a business,” he says.

“Now, students are finding it very difficult to do that once they graduate,” he adds.

It's fair to assume tuition costs will continue their upward trend.

There are myriad options students can use to pay for their education.

First and foremost, students are encouraged to seek out scholarships, grants and bursaries before they turn to borrowing funds.

It's up to the student to know the options.

A good place to start is online. Scholarships Canada or Student Awards are two helpful websites for students seeking financing.

Students can also seek guidance from the university in which they are enrolled.

Once a student has determined what funding is available, the next step is to tally all the costs. This will help determine how much money is needed for the entire school year.

If the bank of mom and dad is not an option, a student may want to take a gap year to save as much money as possible. Or, a student may choose to work throughout the school year.

A student can apply for a loan once he's exhausted all other options.

There are two types of loans that can work in conjunction with one another: government loans and private loans from financial institutions.

Many students who have received government loans may find they still require funding. In such cases, they may choose to arrange a line of credit with their bank.

It's important to note, a student line of credit differs from a credit card. Generally, a student line of credit allows a student to borrow a large sum of money at a low interest rate.

Students are considered higher-risk borrowers than other, more established borrowers. Consequently, the interest rate on a student credit card will likely be high, upwards of 21 per cent.

Laurie Campbell, CEO of Credit Canada Debt Solutions, says students must recognize the costs associated with credit cards, especially if they don't pay off their monthly balance by the due date.

“I see students who have graduated from university or college and they have this big student loan debt, which is fair enough. You have to finance your education somehow,” she says. “But then they have this massive credit card debt, which could have been avoided.”

“A credit card looks awfully appealing when you're running out of money. But your goal really should be to graduate with as little as debt as possible,” she says.

* Name changed upon request

Student loans compared

If you're a full-time student and you're going to get a loan, know your options to make the best choice for your needs.

How do they work?

A government-sponsored student loan in Ontario is provincially (40 per cent) and federally (60 per cent) funded. A student must demonstrate financial need; a parent's income may be a factor.

A line of credit is a revolving loan offered by a financial institution. You must apply to qualify. In some cases, a parent or guardian may have to co-sign the loan. This person will be responsible for the full amount of the loan if you default.

Which is more flexible?

A government loan will offer a fixed loan amount. You will not need to repay your loan (principal and interest) while you are in school. Generally, you can delay payments for six months, or up to 30 months depending on your situation.

A line of credit allows you to borrow the amount you need. In many cases, but certainly not all, you will be required to pay the interest on your loan monthly while you are in school. You will begin repaying the principal plus interest six months to one year after graduation.

What will I pay in interest?

You will be charged interest no matter which option you choose.

Government loans charge interest separately. Provincially, you will be charged the prime interest rate plus 1.0 per cent. Federally, you will be charged the prime interest rate plus 2.5 per cent. You may also choose to lock in your rate at 5 per cent. Interest begins to accrue once you graduate.

Each financial institution offers its own interest rates. In many cases, the rate may be lower than those offered through government loans.

It's important to note, the interest you pay on a government loan will generate an income tax credit, while loans from a bank do not.